My favorite financial news story of 2013 so far might be the Reuters story last Friday about how NYSE and Nasdaq each listed more IPOs than the other during the first quarter. A normal human might find that odd: listing an IPO is the sort of thing that you tend to notice and keep a record of, so you could pretty easily just add up the IPOs you listed and compare. But to a banker, it's obvious that everyone would claim, with some sort of semi-plausible justification, to be first in every league table. In fact the explanation is perfectly, almost paradigmatically natural: Nasdaq excludes REITs, spin-offs, and best efforts deals.1 I remember when I used to exclude REITs! Excluding REITs is, like, 20% of what a capital markets banker does.
A deep tension at the heart of the financial industry is that it attracts a lot of quantitative logical evidence-oriented people and then puts them to work in essentially sales roles, and a lot of what it sells is unsubstantiated mumbo-jumbo. You wrote your senior thesis on geometric Brownian motion in the prices of inflation-linked Peruvian bonds from 1954 to 1976? Great, go make a page telling clients why Bank X is so much better at underwriting commoditized debt deals than Bank Y. Or: your thesis took for granted the truth of the efficient markets hypothesis? Great, go market a hedge fund that charges 2 and 20 to beat the market. You have to be quantitative enough to manipulate the data to get it to say what you want ("This fee run is 0.2% higher if we exclude REITs" "Well, do that then"), but not so quantitative that you find the whole process revolting. It's a hard line to walk, and it's not surprising that Eric Ben-Artzi or Ajit Jain or the quant truthers at S&P end up disgruntled and either blowing whistles or writing regrettable emails.2
Does that explain Lisa Marie Vioni? I dunno, her economics degree came with a side of French, she became a hedge fund marketer, and she's done it for over 20 years, so I'd have pegged her as pretty comfortable in the gray areas. But in January 2012 she went to work for Cerberus as an MD selling its RMBS Opportunities Fund, and in February 2013 they fired her, and now she's suing them. She's suing in part for gender discrimination, which is hard to evaluate from her complaint but sure, maybe.3
But she's also suing as a Dodd-Frank whistleblower, because she complained about what she thought were misleading marketing materials and was more or less told to go pound sand. And those accusations go like this:
In furtherance of Defendant's practice of misleading the Fund's investors and potential investors, Defendant created and distributed performance calculations that included reduced management fees and incentive allocations borne by certain investors in the Fund that were materially different than those borne by the vast majority of the investors (the "Blended Returns"). As a result of Defendant's use of the Blended Returns, the performance numbers that Defendant reported to investors and potential investors were materially higher than the returns based on the full fee structure of the Fund. ...
On September 13, 2012, Plaintiff contacted Defendant's Chief Compliance Officer Andrew Kandel ("Kandel") to report that the Blended Returns were incorrect, inaccurate and misleading (the "Blended Returns Fraud Complaint"). ... On September 14, 2012, Kandel notified Plaintiff that Defendant had decided to continue using the Blended Returns subject to an amended footnote. Defendant, however, had no intention of making any disclosure to its investors or potential investors who may have relied upon the incorrect, inaccurate and misleading Blended Returns. ...
On October 1, 2012, Plaintiff participated in a meeting hosted by Plaintiff's supervisor Joshua Weintraub ("Weintraub"), who is the Head of RMBS Securities and Trading, to discuss the Blended Returns Fraud Complaint. At this meeting Weintraub treated Plaintiff much less favorably than he had before she made the Blended Returns Fraud Complaint.
You think? (She eventually persuaded them to stop using the blended returns, footnoted or otherwise.) Or this:
In mid-to-late December 2012, Plaintiff confirmed that one particular institutional investor (the "Institutional Investor") comprised approximately 72% of the investments in the Fund. The Institutional Investor's 72% is comprised of a fund of funds and advisory clients for whom the Institutional Investor has discretion over investments. Defendant was engaged in securities violations by breaking out advisory clients as if each advisory client is an independent investor in the Fund to create the illusion that the diversification in the Fund is greater than it really is.
And so she complained, and they retaliated, and eventually they fired her.4 And ... what do you think? Assuming everything she says is true, these are like ... kinda crummy things to do, but not really fraud? Like I'm sure when I get around to CFA Level 2 I'll learn that using not-entirely-representative client experiences in your performance reporting is a violation of Charterholdering ethics, but, I mean, it's not illegal is it? (At least, not if you footnote it, right?) Those clients got those returns. And sure there's some liquidity risk of having a bunch of money that could all be pulled by one advisor at the same time, but ... it's not false to say that each of those investors (who are not, like, sleepy retail grandmothers but sovereign wealth funds who had independent meetings with Vioni) is an investor in the Cerberus fund.
Which doesn't mean that you should do it, either as a matter of personal integrity or of intelligent marketing. I imagine hedge fund marketers could disagree over it. I could also imagine marketers not being thrilled about having their marketing efforts labeled "fraud" by their colleagues. Even - especially - if there's some truth to it.
I dunno. I just try and fail to imagine this sort of thing happening on a used car lot, or at an ad agency. Is that the right standard? If the complaint is true, Cerberus was not clearly, honestly, accurately, neutrally and objectively describing reality to invest investors and potential investors. It was shading reality and slicing the facts to make its offering more attractive. It was, y'know, marketing.
1.Reuters says "includes" but in context that seems to be a typo. The score is Nasdaq 18, NYSE 16 by Nasdaq's math (excluding REITs etc.), and NYSE 25, Nasdaq 17 by NYSE's. Reuters's own data, marvellously, has them tied at 16.
2.OR, OF COURSE, BOOKS. Because really the transition is more gradual than I made it out to be: you start making fee runs and LBO models that at least sort of look mathematical and defensible, and only gradually work your way up to the pure sales role. The transition is difficult both because of the obvious intellectual-honesty dimension - when you start you're like doing math and client service and stuff, it's only later that you're selling product - and because it calls on different skills. There's a feedback loop where you're like (1) well, I'm not so good at sales, (2) and hey now that I think about it all this product-pushing seems a little dishonest and beneath me, (3) so I won't try that hard, (4) now I'm even worse at it, (5) boy I never noticed how totally tawdry and dishonest this industry is, (6) oh wow my bonus this year is terrible, (7) the whole industry is unbelievably corrupt and evil. This is obviously my working theory of Greg Smith, but I propose it with plenty of sympathy. I mean, I don't sell derivatives any more either.
3.There are some general "all the senior people at Cerberus are men" allegations, and one specific-ish one:
Upon information and belief, Plaintiff possesses superior qualifications, experience and skills than two male comparators who are Managing Directors in Defendant's RMBS Group. In fact, one of the comparators performed his job responsibilities so poorly that Defendant refused to permit him to perform marketing presentations to its existing or potential investors. Despite this, Defendant paid Plaintiff's male comparators considerably more than it paid her.
4.I mean, allegedly they retaliated obvs. Actually the list of retaliations is a sort of fascinating sociological document in itself:
Defendant subjected Plaintiff to disparate treatment as a result of the Blended Returns Fraud Complaint, which included without limitation, the following: demoting Plaintiff and replacing her with Jonathan Sebiri ("Sebiri") as the Head of Marketing, who was less experienced and less qualified; requiring Plaintiff to report to Sebiri while at the same time training him on the basic concepts of hedge fund marketing; excluding Plaintiff from various meetings with investors and potential investors; excluding Plaintiff from project initiatives; disciplining Plaintiff for engaging in the same activities that similarly situated employees who had not issued a complaint/disclosure about Defendant's dishonest and fraudulent representations engaged in without being disciplined; Weintraub speaking to Plaintiff in a condescending manner; Sebiri, Robert Richter and Weintraub manufacturing complaints about Plaintiffs interactions with service providers; Weintraub and Sebiri hyper-supervising Plaintiffs work; excluding Plaintiff from receiving an equity interest in Defendant's Real Estate Investment Trust; deferring almost 100% of Plaintiffs non-guaranteed bonus for up to ten (10) years; and assigning Plaintiff secretarial/reception tasks. ... Defendant excluded Plaintiff from important investor meetings and precluded her from utilizing portfolio managers to participate in calls with investors. In addition, Defendant deferred Plaintiffs non-guaranteed bonus for three (3) to ten (10) years and advised her that she may never receive the money.
What smoldering drama lies behind "manufacturing complaints about Plaintiffs interactions with service providers"? And has anyone not worked for a boss "while at the same time training him on the basic concepts of [your job]"? Also I love that "speaking to Plaintiff in a condescending manner" made it in there.